Fitch Affs MedStar's - Maryland - $730MM Bds at 'BBB'; Outlook Revised to Stable.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 29, 2002

Fitch Ratings has affirmed the 'BBB' rating on approximately $730 million of MedStar Health Inc.'s (MedStar) outstanding bonds (listed below). In addition Fitch has revised its Outlook for MedStar to Stable from Uncertain.

The stable outlook reflects Georgetown University Hospital (GUH) slow improvement since the time of Fitch's last rating in April of 2001. In addition Fitch is encouraged by the continued strong performance of MedStar's Baltimore's hospitals, and the possibility of a resolution to the ongoing IRS investigation. Georgetown admissions while slightly below budget by 2.7% through the six months ended Dec. 31, 2001 (second quarter of fiscal year 2002), significantly exceeded the previous year's results for the same period by 14.5%. GUH's operating income through the second quarter of fiscal year 2002 was a negative $11.5 million which represents a 24.8% increase compared to budget (negative $15.3 million) and a 39.8% increase from the prior year (negative $19.1 million). Key reasons behind the recovery include a significantly improved case mix, and successful physician recruitment. With regard to the recently released regulations on hospital acquisition financing MedStar has indicated that they are currently weighing their options.

Key credit concerns include continued losses from operations, labor issues at Washington Hospital Center (WHC), and shortfalls in investment income. Despite increasing discharges compared to the prior year and compared to budget at almost all of MedStar's hospitals, operating losses at four of the system's seven hospitals continue to hinder system profitability. WHC posted a $9.1 million loss from operations through the second quarter of fiscal year 2002 which was primarily due to continued use of agency nurses, a residual effect from the nurses' strike that occurred in fiscal 2001. The closure of D.C. General Hospital in May of 2001 also caused an increase in the number of uninsured patients coming to WHC. Management has reacted to the situation by implementing cost reduction initiatives including a workforce reduction at WHC, which is expected to result in $9 million in annual savings. Lower than projected investment income and unrealized losses resulting from poor returns on equity investments continues to hinder bottom line profitability and liquidity growth.

Despite financial and operational improvement throughout the system Fitch believes that reaching profitability at GUH and WHC will be management's greatest challenges. Due to GUH's slow recovery, management's projections indicate breakeven status will be reached at the hospital by fiscal year-end 2004, which Fitch views as achievable. In fiscal 2002 management expects to meet its budgeted operating margin of negative 1.8% for the system but has forecasted a shortfall in its bottom line due to lower than expected investment returns. Fitch believes MedStar will meet their forecast for fiscal 2002 which would result in debt service coverage levels of around 2.5 times (x). Over the next fiscal year, Fitch expects improved results from all of MedStar's hospitals, which should produce gradual improvement in its liquidity position.

MedStar Health is a large, integrated health care system composed of seven hospitals (three in Washington D.C. and four in Baltimore) with a total of 2,332 staffed beds, two long-term care facilities, two freestanding ambulatory surgery centers, and several other health care related organizations. MedStar had total operating revenues of $1.9 billion in fiscal 2001.

Outstanding Debt

--District of Columbia's $40,000,000 series 2001A multimodal revenue bonds (MedStar Health, Inc.);

--District of Columbia's $32,000,000 series 2001B multimodal revenue bonds (MedStar Health, Inc.);

--District of Columbia's $27,500,000 series 2001C multimodal revenue bonds (MedStar Health, Inc.);

--District of Columbia's $50,500,000 series 2001D multimodal revenue bonds (MedStar Health, Inc.);

--$300,000,000 District of Columbia (DC), (Medlantic/Helix) multi-modal revenue bonds series 1998A, 1998B, and 1998C (insured: FSA);

--$166,605,000 Maryland Health and Educational Facilities Authority (MD), (Medlantic/Helix) revenue bonds series 1998A (insured: FSA);

--$116,910,000 Maryland Health and Educational Facilities Authority (MD), (Medlantic/Helix) revenue bonds series 1998B (insured: Ambac Assurance Corp.).